Does the limited company opt out have a future?

“As architects of the limited company opt out in R.32 of the 2003 agency conduct regulations (agency regs) we have always been keen to monitor the impact of its use”, says Adrian Marlowe MD of the recruitment and employment law specialist Lawspeed.

“Back in the days before the agency regs came into force and we were representing a large group of agencies, everyone, contractors and agencies alike, were saying that the worker protections that were then proposed to apply to all agency workers should not apply to businesses. At the same time the DTI as it was then did not want to exclude contractors from scope. The solution which we proposed to and was adopted by the DTI, was to allow contractor businesses to opt out by choice.

“Since being affected by the regulations was seen as a negative so far as IR35 was concerned, contractors have benefitted from opting out. The benefits to agencies though have been significant. Because of the increase of contractor use since the early noughties, agencies have been able to save admin and underwrite their investment in more productive ways. These have included using contracts to contain protective provisions that otherwise would not be allowed by the regulations, such as withholding pay where work has not been done properly, and charging transfer fees beyond the regulatory limits.

“Over the years a number of our agency clients have had disputes with contractors. Time and time again the opt out has come to the rescue, not in terms of unfairly prejudicing the contractor but by protecting the agency from regulations that were designed to protect vulnerable agency workers, not contractors who chose not to have that protection.

The evidence would suggest that the opt out has always been fair. The DTI and BEIS have regularly reviewed the agency regs and at no stage has there been any suggestion of repeal. So, all hail the opt out, but what now given the new IR35 rules to apply in April 2020?

“With many employment businesses set to switch from contractor use to PAYE or umbrella companies in order to avoid the new invasive IR35 rules, will individuals still want to opt out? Firstly they cannot if they are paid PAYE, and secondly why would they want to if IR35 is no longer an issue? Umbrella companies have little interest in this area unless the agency insists upon opt out and it is worth remembering that it is unlawful to make the provision of services conditional upon the worker and company opting out. Agencies will still want to achieve opt outs for the reasons given above, but there must be a big question mark over whether they will now always get them.

“This implies that agencies that are used to operating in one particular way, with PSCs that opt out, will be forced to change their procedures and indeed in some cases their contracts unless they would rather lose the contractors and business from their books.

“In conclusion, the opt out will stay and still be useful for those that continue to deal with PSC contractors who want to opt out because of IR35. In all other cases the opt out may be a tool that has to be left in the garden shed collecting dust until the government decides to change the rules again – there is little indication of that at the moment with the IR35 private sector rules set to apply and a government intent on raising more revenue to meet its education, police, and NHS funding promises.”

For more information on the opt out and other consequences of the new IR35 rules come to the Lawspeed conference on 19th September in London.

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